Dr. P.V. Viswanath
|Courses / MBA 673 /|
MBA 673: Financial Strategy and Business Decisions Fall 2018
Students in an MBA program take a variety of courses in the different functional areas. Often, they have no way to tie everything together. Capstone courses manage this to some extent; however, the insights of finance are often left out. This course will provide students with the knowledge as to how to translate these insights into superior strategic decisions in areas such as marketing, human resource management, supply chain management and competitive strategy. In this course, we will look at several areas where financial decision choices impact in important ways decisions in the other functional areas of the firm.
As you can see from this list, this course really integrates the different areas of business, by looking at them from a economics/finance point of view. Whether you are in Human Resource Management or in Accounting or in Management or in Strategic Management, the tools and the perspectives that you will be exposed to in this course will give you an advantage over other professionals in your field.
We first start out looking at what financial decisions are and conclude that they include all decisions that have to do with the liabilities side of the balance sheet, while the left-hand side of the balance sheet reflects operating decisions, such as asset choice etc. We expand this insight by noting that current assets (for example accounts payable and accounts receivable) are the flip side of current liabilities and hence we should modify our balance sheet to include Net Current Liabilities (Current liabilities less current assets) on the liabilities side of the balance sheet. Thus financial decisions include working capital decisions, decisions about how much debt to issue (relative to equity), the particulars of the debt (and the equity), dividend decisions (which affect the total amount of equity) and finally, the contingent financial contracts that the firm enters into that affect the overall riskiness of the firm (which can include either contingent contracts dealing with interest rate obligations, foreign exchange or commodity contracts).
Following this, we start out with a look at Porter’s Five Forces Model. This model is often used to evaluate an industry. However, the objective here is not that. Rather, we are using it as a model for the different factors that impinge upon a firm. We can then look at how financial decisions affect a firm’s relationship with those five forces: existing competitors, new entrants into the industry, competition from other (existing and new) industries (i.e. new products), suppliers, customers and finally the government, which even though it is not one of the five forces, is behind the scenes in all the five interactions.
We now start the main part of the course, which involves looking at how financial decisions circumscribe our ability to make operating decisions, i.e. decisions relating to the firm’s assets (the left-hand side of the balance sheet), such as personnel decisions, marketing decisions, advertising decisions, competitive strategy and dealings with the government, unions and other institutional players in the business world. For this purpose, we divide financial decisions into three categories: working capital decisions, capital structure decisions and financial risk management decisions, and look at each one in turn.
In order to deal with working capital decisions, we use a well-known, but little used model, the Dupont model, which breaks down return on assets into the product of operating margin, asset turnover and leverage. We use this model to look at the interactions between financial decisions and marketing decisions, such as the volume-margin decision and show how to use accounting information to understand and analyze these decisions as well as allow an optimization of net working capital.
Next, we turn to capital structure. We first show how leverage decisions cause management to act in ways they would not others act if the firm were entirely equity-financed. This provides the basis for an analysis of how capital structure can be used by management to manipulate, convince and out-maneuver the five (six) Porter factors. We provide a quick intro to game theory and how to use game theory to analyze some aspects of competition, following which, we look at have leverage decisions can be used as components of the firm’s competitive strategy. Next we look at how leverage decisions influence and can be used to extract value from product decisions, personnel decisions and other operating decisions.
Finally, we introduce risk management and the different tools that are used by the firm to engage in financial risk management. This allows us, then, to look at the implications of financial risk management (hedging) decisions on other operating decisions.
Part of the course is a look at corporate governance and how corporate governance decisions – whether they are taken by the firm or whether they are part of the legal, institutional and business culture that the firm operates in – have implications for whether and how financial decisions can affect operating decisions.accompanying pdf document. (Make sure to use my name, Viswanath, in searching for the book.) We will also be doing a few cases. One of them is Risk Management at Apache, HBS case 201113-PDF-ENG. This case can be purchased by going to https://hbsp.harvard.edu/product/201113-PDF-ENG. We may discuss some other cases, well. Details of these other cases will be provided later.
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Check your e-mail and the MBA 673 website on a regular basis. This will enable you to get the maximum from the course. I am available for consultation by e-mail at firstname.lastname@example.org. I check my e-mail practically every day, and, in most cases, you should get a speedy response to any questions.
We will also be using Blackboard as a gateway for some aspects of the course. Please log in to Blackboard at the earliest opportunity. Blackboard login procedures can be found on the appropriate Blackboard site. Essentially, your login ID for Blackboard will be your email ID, and your password will be your 9-digit social security number.
Make sure you bring a laptop to class since you will be using web resources for some of these assignments. Make sure also that your laptop is charged. (Please do not use classtime to read your email or do other things unrelated to the class.)
We will be doing class exercises in groups. Please form groups on the first day of classes. It is important that there be diversity in class groups; this is very important for student learning. If I believe that a group is overly homogenous, then I may reassign students to other groups.
Each group will be required to research and make a presentation (if there is time) on a topic related to the interaction of finance with a non-finance management decision area.
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I am likely to give you assignments over the course of the term. The main purpose of these assignments is to make sure that you understand the material, and to prepare you for the exams. Assignments can be found on Blackboard under the different modules. Due Dates for all assignments can be found on the Course Calendar page.
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Note that the minimum and maximum quantitative scores for plus and minus refinements to the letter grades will be at my discretion. These will be partly determined by the distribution of student scores within each letter grade category. I place a high value on effort; at my discretion, I will raise your grade one notch if I feel that you have tried hard to satisfy all the requirements of the course.
Students must have satisfied the prerequisite for this course, viz. MBA 648. I will presume complete familiarity with all topics taught in this course.